Europe now outstripping the US on deal performance

European companies are enjoying better returns from M&A than their American counterparts, after years of trailing in their wake...

by James Taylor
Last Updated: 19 Aug 2013
European companies are getting pretty good at doing big deals: acquirers saw their share price outperform the average by 12.2% during the first quarter of 2011, according to the latest research from Towers Watson. That's a much bigger outperformance than their counterparts in the US and Asia managed (at 5.1% and 1.9% respectively) – suggesting that after years of lagging behind, European companies have got an awful lot better at making deals pay off. So what's changed?

Towers Watson's Quarterly Deal Performance Monitor looks at all deals with a value of at least £100m where the buyer has taken a majority share, and tracks the acquirer's share price from six months prior to the deal announcement up to the end of the quarter. And the good news - especially if you're an M&A banker on the lookout for fresh meat - is that anyone who makes an acquisition tends to outperform the market, at least in the relatively short term. The average acquirer enjoyed a 5.1% boost over and above the return from the MSCI world index (a weighted basket of shares). Towers Watson says this relatively recent phenomenon – dating only from the Noughties, apparently – shows that doing big deals is now ‘a route to outperformance... and can add real value.'

Europe's strong showing is particularly impressive since its companies are often starting at a disadvantage compared with US companies. Towers Watson's M&A practice leader Steve Allan points out that the bigger, cross-border deals are much harder to pull off successfully - and inevitably, many European deals fall into that category, while many US deals don't. But any advantage this did bring no longer seems to apply.

Companies seem to be getting better at dealing with people issues, one of the most common reasons for deals failing, Allen tells MT. That means planning ahead and getting HR involved. It means getting the basics right, like sorting out people's pay, pensions and incentives (which doesn’t always happen, apparently, especially if a division is being carved out of a parent company). And it means communicating well: i.e. having a plan, being consistent, being honest and making sure that 'the talent knows it's the talent’. As Allen says: ‘The last thing you want to do is lose the people you most want to keep'.

But perhaps fear is the biggest reason why we’ve got better at doing deals. ‘Companies don’t want to get this wrong, so there’s more rigour,’ says Allan. ‘And they’re better at walking away from deals, even when there’s a lot of momentum there.’ So perhaps European companies just aren’t doing as many bad deals as they used to these days. Maybe there’s an upside to the downturn after all.

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